“Exceptions to the long pattern of excessively optimistic forecasts are rare, as a progression of consensus earnings estimates for the S&P 500 shows (Exhibit 1). Only in years such as 2003 to 2006, when strong economic growth generated actual earnings that caught up with earlier predictions, do forecasts actually hit the mark.

This pattern confirms our earlier findings that analysts typically lag behind events in revising their forecasts to reflect new economic conditions. When economic growth accelerates, the size of the forecast error declines; when economic growth slows, it increases. So as economic growth cycles up and down, the actual earnings S&P 500 companies report occasionally coincide with the analysts’ forecasts, as they did, for example, in 1988, from 1994 to 1997, and from 2003 to 2006.

Moreover, analysts have been persistently overoptimistic for the past 25 years, with estimates ranging from 10 to 12 percent a year, compared with actual earnings growth of 6 percent. Over this time frame, actual earnings growth surpassed forecasts in only two instances, both during the earnings recovery following a recession. On average, analysts’ forecasts have been almost 100 percent too high.” (emphasis added)

The good news is the markets don’t take analysts nearly as seriously as they used to . . .

Note: I rarely quote McKinsey, as I have a pet theory they are at the root of all economic evil in the world. So far, my evidence is only anecdotal. If anyone wants a summer internship quantifying the negative impact of McKinsey on the world via actual data, please contact me.

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

28 Responses to “McKinsey: Equity Analysts Are Still Too Bullish”

Two years (out of 24) the first estimate is lower than the reality. Why anybody thinks those guys are worth their salary is beyond me.

[Re your pet theory: Absolutely correct. Why would you hire a bunch of young people completely inexperienced in your biz to make a recommendation and not live with the consequences? And for some reason it's considered an acceptable excuse: But the consultants recommended it!]

Your suspicions about the consulting industry are largely correct. I was a partner at three firms during 1980-2000, and during that time (especially during the 1990s) I watched the industry evolve into a malevolent influence. While highly influential, McKinsey is by no means the worst of the lot.

Amen on McKinsey. That would be an easy intern job. All you have to do is contact the thousands of people such as myself who have hard facts and data from personal experience about McKinsey’s work in Fortune 500 companies. The data would be unassailable. The bottom line of the study would be simple: McKinsey exists to make large profits from justifying the ridiculous ideas of narcissistic senior executives. We used to call it profitable pandering through analytical manipulation.

McKinsey came to the pharmaceutical company I worked for in the 70′s and 80′s and I was astounded at their lack of anything except bullshit, of which there was plenty. Many of their recommendations were followed. The company no longer exists.
Later I read about McKinsey’s involvement in Enron……wasn’t all that surprised.

The good news is the markets don’t take analysts nearly as seriously as they used to . . .

reply:
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Yes, but they still play an important role. They are the unseen experts who are paid to know important things. They are bullish but, somehow, the media notes that actual results frequently beat analyst expectations. They are to greed what the smell of good food is to salivation.

Experts in the shadows, who always get it too low, say that great numbers are ahead. Buy now or be left behind. It’s just free money laying on the pavement. Analysts add credibility to headlines and give sales pundits the ammunition to rope in fresh cash or keep old cash still in the game.

One set of analysts always gets it too low, as in having their estimates beat yet once again. These are the micro analysts or the specialists. The other set takes the macro view and proclaims bloated projected futuristic EPS and P/E levels for the market as a whole.

It seems the average person confuses the specialties and just sees free money on the pavement, thanks to analysts who only the ‘smart money’ can properly decipher.

lol… please tell me you have a team of interns each summer, unlocking all the secrets of the world.

Maybe one to correlate the career path of Timmy G with action at (and eventual condition of) each organization he has been in charge of? I have a feeling we would see a pretty interesting pattern there.

But if you want to add an intern to look for lost Nazi gold, I would like that too.

Seriously, my favorite story is how McKinsey advised a bank to get into middle-market lending around 1990. So First Interstate did so, lost their butts, and ended up mostly liquidating most of the portfolio. Lovely!

This is classic Mckinsey. Restating the obvious. My bro works for a fortune 500 co. Mckinsey is hired to do a review. Consultant goes around and talks to my brother and other managers. After review the managers and president sit down with consultant in conference room. Consultant just regurgitates various managers suggestions for improvement. President asks Consultant is she has any “original ideas”. Basically the end of the meeting.

When I think of the consultants role in business, I can’t get out of my head the two consultants in “Office Space” that promoted the guy that had basically gone rogue, and was cleaning fish at his desk, among other outrages.

These consultancies make billions because they get hired and rehired time after time by Furtune 500 companies. These are the most successful companies in the world and you have to assume their top executives are capable people.

Are you saying that all the top companies are filled with incompetent managers that hire consultants for no good reason time after time even after these consultants delivered no value in all the last projects ?

Or are you saying McKinsey et al have some sort of a hypno magic trick on these guys?

Maybe they get rehired because they actually deliver value? Maybe the failures that get public are just anecdotes? Consultants have been around in their current form for the last 20-40 years… how come you can only point out to a dozen or so of hearsay “failures”?

This study is as LAME as the typical consulting output. Its just wrong / some simple bias in how inexperienced people framed or referenced the data. That is why every year looks too similar. Its a study bias… not economic.

It is simply incorrect to say that in 1996 EPS estimates for 1998 were higher than they actually came in. It is hard to judge this because a) they did not include 2009, the easiest comp and b) the number for “EPS” makes no sense. I see S&P500 earnings as $40-90/shr.

What do $0.4 and $0.7 mean? Please tell me they are not doing a simple average of “eps” across shares/companies. That is moronic.

But either way, it is clear from looking at this chart that it is simply the result of poor workmanship and not really thinking about the study, data consistency, proper methodology, etc.

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Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

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